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Fees Gone Wild: Why You're Paying More for Everything

It's not your imagination: Your wallet is under attack by a swarm of sneaky fees and hidden charges.

With consumers demanding lower prices, businesses are seeking new ways to raise revenue, and have started charging separately for services that were once taken for granted. Formerly complimentary add-ons are still there, but now you have to pay a fee to get them. Then the cycle kicks in: Customers end up squeezed, lawmakers become outraged, new regulations are passed to limit business practices — and companies start looking for new ways to boost their top line.

Consider the recent surge in line-item gotchas: printed-check charges, hotel resort fees, and extra costs for transactions made anywhere but a company’s Web site. (For more, see our related story, “29 Fees We Hate.”) The rationale behind them is pretty straightforward — businesses need to make money, and consumers have no stomach for higher prices. But in signing up for what are advertised as cheap new offerings, unsuspecting shoppers end up paying just as much if not more than they would have before getting those “great” deals.

“Consumers have always been price sensitive, but today they’re even more price sensitive,” says Dennis Cauvier, a former personal and corporate lender and co-author of The ABCs of Making Money. “In order to compete, you have to offer up your best advertised price, whether you’re an airline, a cell phone company — whatever. So you offer the most advantageous price, knowing full well the consumer is ignorant to the realities or they’re just too lazy to read the fine print. Organizations have to appear to be more competitive but they can’t really lower their price — so they’ll lower their price on the surface and find other things to erode their value offer.”

In the Fine Print

American Express is one company whose customers will be paying more this fall. “Like all companies large and small, our pricing has to be responsive to the business and economic environment, and as a result we’ve had to make some changes to our product,” says Molly Faust, spokeswoman for American Express, which recently raised rates on some of its credit cards. “But we have always notified card members,” she adds.

Of course they have: By federal law, credit card companies must disclose any changes they are making. But customers often ignore those small-print disclosures.

“Sophisticated people can avoid many charges and fees,” says Xavier Gabaix, an associate professor of finance at New York University who co-authored an article on hidden fees that appeared back in the 2006 Quarterly Journal of Economics.

That article, written with Harvard economics professor David Laibson, found that businesses bank on a group of less-than-savvy consumers whom Laibson and Gabaix call “myopes.” These are the people who raid the hotel minibar rather than run down to the deli next door, or habitually pay their credit cards late. Admittedly, some may be happy to pay extra for the minibar convenience — but for most, it’s an unsophisticated behavior pattern that often leads to financial pain.

At the extreme, the consequences can be tragic, Gabaix says: “If you think about all those people who got a mortgage that looked good because it had very low interest rates in the first few years, but then the interest rate exploded, and they lost their house — it creates an enormous amount of misery.”

An Australian Model?

For Edgar Dworsky, a former assistant attorney general for consumer protection in Massachusetts, the issue boils down to disclosure. If he had his way, Congress would enact a law requiring sellers to disclose the complete price; he cites an Australian measure that requires companies to label items with the full price, including taxes and surcharges.

Companies have essentially changed their pricing structure to make their products look cheaper than they really are, says Dworsky, whose Web site, mouseprint.org, examines the fine print in advertising. “Even in good times, companies want to show a low price for a product that serves the consumer,” he says. “They’ve unbundled some of the cost that really should be in that price to make it look less expensive than it really is.”

There is a movement afoot to challenge the hidden fee practice. In August, T-Mobile sent a note to its customers saying that it would charge them $1.50 a month if they continued to get paper bills. Customers revolted, and the company decided to roll back the plan. And after a flurry of media attention, a few of the large banks (led by Bank of America and JPMorgan Chase) have announced plans to lower or eliminate their overdraft fees and give customers the chance to opt out of overdraft protection.

The lesson: Keep track of the fine print, and if you don’t like it, take your business elsewhere. “If you know you’re going to incur fees with one credit card, be smart about the card you pick out of your wallet,” says Dworsky. “If a cell company charges some fee that irks you and a competitor doesn’t, try to go to the competitor.”

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